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UK government dishes out extensive tax cuts as country braces for recession

U.K. Chancellor Kwasi Kwarteng outside 10 Downing Street. Britain will cap the cost of electricity and gas for businesses.
Rob Pinney | Getty Images News | Getty Images

LONDON — The new U.K. government announced a sweeping program of tax cuts and investment incentives Friday, as Prime Minister Liz Truss seeks to boost the country’s faltering economic growth.

Finance minister Kwasi Kwarteng confirmed previously-leaked plans to cancel a planned rise in corporation tax to 25%, keeping it at 19%, the lowest rate in the G20; to reverse a recent 1.25% rise in National Insurance; and to cut a tax on home purchases.

“We believe high taxes reduce incentives to work, deter investment and hinder enterprise,” Kwarteng said.

He also outlined plans for a network of “investment zones” around the country that will have lower taxation rates for businesses and liberalised planning rules, as well as a new bill to unpack planning restrictions and EU laws. He announced a list of infrastructure projects across transport, energy and telecoms. Tourists will now get VAT free shopping, an increase in rates on alcohol will be cancelled, and the cap on bankers’ bonuses will be scrapped, he added.

Speaking to the House of Commons, Kwarteng said the government wanted a “new approach for a new era focused on growth” and was targeting a medium-term trend rate of growth of 2.5%.

He said the government wanted to expand the supply side of the economy through tax incentives and reform to deliver higher wages, greater opportunities, fund public services and “compete with dynamic economies around the world.”

It comes a day after the Bank of England said the U.K. economy was likely to have entered an official recession in the third quarter, as it hiked interest rates by 50 basis points to combat decades-high inflation.

Despite containing extensive reforms, the package is not being described by the government as an official budget as it has not been accompanied by the usual economic forecasts from the Office for Budget Responsibility.

Critics of the proposals warn that the combination of extensive tax cuts and the government’s plan to shield households and businesses from soaring energy prices will see the U.K. take on high levels of debt at a time of rising rates. The energy support package is expected to cost more than £100 billion ($111 billion) over two years.

Data published Wednesday showed the U.K. government borrowed £11.8 billion in August, significantly above forecasts and £6.5 billion more than the same month in 2019, due to a rise in government spending.

Kwarteng said Friday the U.K. had the second-lowest debt to GDP ratio in the G-7 and would announce a plan to reduce debt as a percentage of GDP in the medium term.

On energy, he said price caps would reduce peak inflation by 5 percentage points and lower the wider cost-of-living pressures. He also announced an energy markets financing scheme, in conjunction with the Bank of England, that will offer a 100% guarantee to commercial banks who offer emergency liquidity to energy traders.

The Institute for Fiscal Studies, an economic research group, said the reversal in the income tax rise and canceling the planned rise in corporation tax would lead to a £30 billion reduction in taxation revenue. It added that “setting plans underpinned by the idea that headline tax cuts will deliver a sustained boost to growth is a gamble, at best.”

The opposition Labour party argue that the tax cuts will disproportionately benefit the wealthy and be funded by unsustainable borrowing.

This is a breaking news story, please check back later for more.

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